First off, a little FHA “refresher.” The HECM, or Home Equity Conversion Mortgage, is just FHA’s fancy name for the reverse mortgage. You’ll hear terms like “HECM for Purchase” or “Reverse Mortgage for Purchase” or “H4P” or “R4P”. Just to be clear, these all represent the same product – the reverse mortgage.
In 2009, FHA began allowing the reverse mortgage for the purchase of a new home. Prior to 2009, the reverse mortgage could not be used to acquire a new home. It could only be used on homes that borrowers were currently occupying, and intending to continue to occupy.
With allowing borrowers to use the reverse mortgage to purchase a new primary residence, a new opportunity arose for homeowners looking to downsize to a new home. The best part is they could now do so with no monthly mortgage payments, and also give them the ability to just about double what they could afford as a cash buyer.
Let’s say we have a 67 year old borrower that wants to sell their existing home and purchase a new primary residence. Maybe it’s to move to a one level home, or maybe there’s too much land, or maybe it’s just to be closer to the grandkids. Regardless of the reason, they don’t want to stay in their existing home.
Using the HECM for Purchase, that borrower could sell their existing home, take the cash proceeds and use it as a down payment on a new home. There are a few substantial benefits to using the HECM for Purchase as opposed to paying cash and/or using conventional financing to buy the new home.
Benefit #1 – Increase the purchase price of the new home.
Using the HECM for Purchase, the borrower will get access to approximately 50% financing on the new home. Meaning, if the borrower has $200,000 in proceeds from the sale of their existing home, they could essentially double their purchasing power.
Example – Using the $200,000 in proceeds, they could afford to purchase a new home for approximately $400,000. The reverse mortgage would provide financing for approximately 50% of the purchase price ($200,000) and the borrower comes up with the remaining 50% ($200,000).
Benefit #2 – Keep more cash in reserves.
Let’s say the same borrower has the same $200,000 in proceeds from the sale of their home, but instead of using it all to buy a new home they want to keep some cash in hand.
Here’s how this would work….
Example – The borrower finds a $200,000 home they’d like to purchase. Instead of using all $200,000 of their proceeds to pay cash for the home, they use the reverse mortgage to provided financing for 50% of the purchase price ($100,000) and they come up with the remaining 50% ($100,000).
This would give them the ability to buy the new home, have no monthly mortgage payments and keep $100,00 of the proceeds in their control.
Benefit #3 – Income / credit qualification.
While there are income and credit requirements on reverse mortgages, they’re not the same as a conventional “forward” mortgage. The majority of reverse mortgage borrowers are at a stage in their life where they’re no longer working full time jobs and are instead living off of a “fixed” income (Social Security, pension, investment portfolios, etc.). Because a conventional type loan requires a monthly payment, the borrower normally doesn’t show enough income to meet the underwriting requirements for the new loan.
On a reverse mortgage, the lender is not required to calculate a monthly mortgage payment in to the equation, because there are none.
Instead of using an equation that calculates total debts and divides them in to the total income, the reverse mortgage simply requires an amount of “residual income.” In our area, it’s $529 per month for a one person household.
Benefit #4 – No monthly mortgage payments.
I think this benefit pretty much speaks for itself, so I’ll keep it short and sweet.
When a borrower initially tells us they want to pay all cash for their new home, that’s normally for one reason…
They don’t want a mortgage payment.
With the reverse mortgage, they have no monthly mortgage payments.
This article was written by Eric Rittmeyer with Fidelis Mortgage, and used with permission. For more information about using a reverse mortgage to purchase a home, please contact Eric at email@example.com or 410-668-6501.